Fintech and the Financing of Entrepreneurs: From Crowdfunding to Marketplace Lending

Fintech and the Financing of Entrepreneurs: From Crowdfunding to Marketplace Lending

The increasing demand for Fintech – broadly defined as the use of new technology and innovation to compete in the marketplace of financial institutions and intermediaries – is the result of fast funding and online applications which has lowered costs for their clients. This, in turn, has helped on-line lenders in the United States to become important providers of capital to young firms while helping to bridge the funding gap in the SME credit market.

Fintech has disrupted or is disrupting the financial service sector in at least three ways. First, online platforms, which differ from traditional funding channels, allowing financial service providers to offer a wide range of new services that remove intermediaries and administrative layers to make transactions more effective and less prone to error. In this way, financial services are decentralized and made flatter. Most obviously, there is the growth of mobile banking that allows customers to perform a wide range of transactions online. Second, networked access to financial services facilitates quicker access to all manner of transactions from checking financial status, making payments, and withdrawing and transferring funds. Third, behind the scenes activities of financial institutions are similarly transformed. In part, this involves the use of Big Data to deliver a more efficient service, but it also allows firms to use technology to manage legal risk more effectively. Finally, in the absence of industry-wide standardization, it is clear that peer-to-peer (‘P2P’) platforms will enjoy lower operating and capital expenses compared to traditional banks.

In our study, we consider the regulatory factors that are influencing Fintech startups. To test whether lawmakers respond to the ongoing development of Fintech firms or attempt to support the extant financial system and their own style of regulation, we examine the regulatory response in seventeen countries. First, we looked at first time venture capital investments in Fintech companies. The intention was to see whether there was a meaningful connection between levels of investment and regulatory choice. Our results confirm anecdotal evidence of a slow-down of interest in Fintech in 2015. From 2015-2016, the total Fintech funding declined approximately 50 percent, down to $25 billion from $47 billion in 2015. But interestingly, in six of the twelve jurisdictions there was an increase in investment activity in 2016. Second, we distinguished between two broad categories of government response - reactive and proactive - each of which has a number of sub-categories.

Second, our findings show that countries with a more proactive response - particularly involving regulatory guidance or regulatory experimentation – are more attractive as a potential location for starting Fintech operations. This suggests that the regulatory environment affects the degree of investment and - perhaps as importantly - the willingness of companies to start operations in one jurisdiction, rather than another.

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